Low rates prompting ‘excessive risk-taking’, ECB warns

by AFP/ pic by BLOOMBERG

GERMANY – Historically low eurozone interest rates likely to persist into the foreseeable future are causing increased risk-taking that could threaten financial stability, the European Central Bank said Wednesday.

“While the low interest rate environment supports the overall economy, we also note an increase in risk-taking which could… create financial stability challenges,” ECB vice-president Luis de Guindos said in a statement.

“Signs of excessive risk-taking” were spotted by the Frankfurt institution among non-bank financial players like “investment funds, insurance companies and pension funds”.

Many “have increased their exposure to riskier segments of the corporate and sovereign sectors,” it said.

Extremely low or negative yields on debt from safer borrowers have prompted investors to seek out riskier bets in search of returns.

But while the ECB’s twice-yearly update to its risk assessment shifted focus from May’s trade war concerns, “downside risks to global and euro area economic growth have increased” in the meantime, it warned.

Such dangers included “persistent uncertainty, an escalation in trade protectionism, a no-deal Brexit and weak performance of emerging markets,” notably China, the ECB said.

An economic downturn could crash prices for riskier and less liquid assets as actors like asset managers or hedge funds sell up in a hurry.

“This may have implications for the ease and cost of corporate financing which could exacerbate any real economy downturn,” the ECB warned.

Elsewhere in the economy, lower interest rates also “appear to be encouraging more borrowing by riskier firms” in non-financial sectors, as well as inflating property prices in some parts of the eurozone.

But the ECB judged that authorities in the 19 eurozone countries were already taking steps to head off financial stability risks from property bubbles.

Meanwhile the central bank found that “bank profitability concerns remain prominent” as growth has weakened and eurozone policymakers further lowered a key interest rate in September.

As well as outside pressure, banks “have made slow progress in addressing structural challenges”.

Those include slow improvements on multiple fronts like disposing of so-called “non-performing” loans, where borrowers have fallen behind on payments.

Lenders must also cut costs and reduce overcapacity, and are largely failing to diversify their businesses, the ECB judged.

But most banks have the liquid assets on hand to withstand any foreseeable financial shocks, it added.